Course Outline
Join PRO

What is the purpose of the Allowance for Doubtful Accounts?

Author:
Harold Averkamp, CPA, MBA

Definition of Allowance for Doubtful Accounts

The Allowance for Doubtful Accounts or Allowance for Uncollectible Accounts is a general ledger contra account associated with the current asset account Accounts Receivable.

The credit balance in Allowance for Doubtful Accounts reduces the amount reported on a company’s balance sheet for accounts receivable to the amount that is expected to be collected.

The balance sheet account Allowance for Doubtful account is also associated with the income statement account Bad Debt Expense or Uncollectible Account Expense.

Example of Allowance for Doubtful Accounts

Assume that a company has 500 customers purchasing on credit and they owe the company the $1,000,000 debit balance in Accounts Receivable.

Even though the company sold only to credit worthy customers, the company’s experience is that a small percent of customers will not pay the full amount. After reviewing the customers’ balances the company estimates that $10,000 of the $1,000,000 will not be collected.

Rather than waiting until the specific customers are known with certainty, good accounting requires the company to record the following adjusting entry:

  • A debit to Bad Debt Expense that will cause the income statement to report the estimated $10,000 loss closer to the time of the credit sales
  • A credit to Allowance for Doubtful Accounts that will cause the balance sheet to report that only $990,000 of the receivables will be collected

Using the account Allowance for Doubtful Accounts is preferred for financial reporting. However, it is generally not allowed for U.S. income tax reporting. You should always consultant with a tax professional for the income tax rules.

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus